Can Higher Mortgage Rates Stall The Housing Recovery?

Includes: BAC, C, JPM, KME, USB, WFC
by: Markos Kaminis

The latest report from the Mortgage Bankers Association (MBA) indicates prospective homebuyers turned away last week. The catalyst was higher mortgage rates, which rose in concert with interest rates across the board on what was perceived to be a strong employment report. This begs the question if higher rates could stall the housing recovery.

The MBA reported a 4.7% decline in its Market Composite Index measuring mortgage applications for the week ending March 8, 2013. The MBA's measure of refinancing activity fell by 5.0%, and the Purchase Index, which measures applications tied to home purchases, fell by 3.0%.

The catalyst was higher mortgage rates, which rose to their highest level in six months' time. The rate on the average 30-year fixed rate mortgage signed on a conforming loan balance increased to 3.81%, up from 3.7% the week before, with points unchanged. In fact, effective rates increased across all types of mortgage loans.

The shares of the nation's most important mortgage lenders have been on a tear this year, with Bank of America (NYSE:BAC), Citigroup (NYSE:C), J.P. Morgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) all market leaders. One of the more important reasons for this has been reviving housing demand. Despite the burden many of these banks still bear from the real estate crisis, investors have been betting that the leading mortgage lenders would prosper anew. But what if higher rates stall the housing recovery because of a still shaky economy?

Chart forBank of America Corporation

Chart at Yahoo Finance

The latest Employment Situation Report served as the catalyst for the rise, because it showed decent private nonfarm payroll growth and an improved unemployment rate. However, I contested the message, and showed that if an employment participation rate reflective of the economy in 2006 were applied to the data, unemployment would measure 11.8% and underemployment 18%, each much higher than the reported figures. Furthermore, the data deteriorated last month under my calculation, versus the government's reported improvement.

Indeed, there are at least 5 Economic Problems that Need Reconciling, in my view. If the economy is not as sturdy as is being implied by rising mortgage rates, then certainly, they could stall the housing recovery.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.